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Just before the 2014 election, then opposition leader Daniel Andrews was desperate to neutralise what was seen as a key vulnerability for Labor.<\/p>\n
The Coalition government had been ramping up its attacks on Labor\u2019s financial credibility, warning voters not to trust it with the budget.<\/p>\n
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Jacinta Allan will have to tackle the state\u2019s debt.<\/span>Credit: <\/span>Joe Armao<\/cite><\/p>\n In a typically shrewd tactical response, Andrews quietly hired Jeff Kennett\u2019s chief fiscal surgeon, Professor Bob Officer, to scrutinise Labor\u2019s election costings.<\/p>\n Officer had chaired Kennett\u2019s 1992 Victorian Commission of Audit and the Howard government\u2019s 1996 National Commission of Audit \u2013 both of which paved the way for deep spending cuts. He gave his verdict two days before the Victorian election, ruling that Labor had been \u201ccomprehensive and thorough\u201d with its costings.<\/p>\n Getting Officer, a man highly respected on the conservative side, to sign off on Labor\u2019s financial plan was a clever move.<\/p>\n Then shadow treasurer Tim Pallas declared it was \u201cthe most rigorous costings process ever undertaken by an opposition\u201d, promising no impact on Victoria\u2019s budget surplus predictions, no increase in net debt, no increase in taxes and no impact on Victoria\u2019s AAA credit rating.<\/p>\n Former premier Daniel Andrews and Tim Pallas.<\/span>Credit: <\/span>Eddie Jim<\/cite><\/p>\n A great deal of financial water has since flowed under the fiscal bridge, including a pandemic, a housing slump, soaring inflation and an aggressive interest rate tightening cycle. Add to that an infrastructure agenda likely to keep costing the state about $20 billion a year for the foreseeable future.<\/p>\n Victoria now has a lower credit rating, the highest debt, and \u2013 arguably \u2013 the highest state taxes per person in the nation.<\/p>\n Just how dire is the financial situation now confronting Victoria\u2019s 49th premier, Jacinta Allan? The big issue for the government will not so much be the current debt level, high though it is. It is the ability of the state budget and the economy to handle it.<\/p>\n Nine years later, Officer now says the financial situation confronting the state is \u201csomewhat intimidating\u201d. He points out that Victoria\u2019s debt levels are now much greater than during the Cain-Kirner years both in absolute and relative terms.<\/p>\n \u201cThe only way to ease the pain of that debt is by productivity increases and or selling off assets,\u201d Officer told The Age<\/em> on Wednesday. \u201cBut there isn\u2019t that much there left [to sell] and the tax base of the state is very narrow, and somewhat antithetical to productivity.<\/p>\n \u201cAt the broad level the figures look somewhat intimidating, I have to say. It is not going to be easy. In the short-term interest rates are not going to go up much more, in the longer term I\u2019m not optimistic.\u201d<\/p>\n According to state Treasury\u2019s May budget predictions, net debt is set to grow from about $135.4 billion by the middle of next year to $171.4 billion by mid-2027.<\/p>\n That would represent an extraordinary $146 billion increase since 2018-19, just before the pandemic derailed the state\u2019s economy.<\/p>\n The government has been particularly keen to distinguish \u201cemergency\u201d debt, used to protect the economy and the health system part of the government\u2019s COVID-19 response, from more productive borrowings used to fund the government\u2019s infrastructure program.<\/p>\n Despite the government\u2019s tough talk in this year\u2019s budget about repaying COVID borrowing racked up during the pandemic, net debt as a proportion of the state economy is to keep rising, hitting 24.5 per cent by mid-2027. That far exceeds the previous high of 16.1 per cent reached during the recession of the early 1990s.<\/p>\n The idea is that a return to budget surpluses from 2025-26 onwards will gradually begin to drag Victoria\u2019s debt levels back down.<\/p>\n This, however, remains an aspiration extending beyond the budget\u2019s four-year forecasting period. There is a lot that could go wrong between now and then.<\/p>\n Former premier Steve Bracks points out that much of the state\u2019s debt has been built up for productive purposes.<\/p>\n \u201cThe difference is that this government borrowed for infrastructure, borrowed to provide real services that improve the life of Victorians,\u201d Bracks told The Age<\/em>.<\/p>\n \u201cMuch of the debt is at a very low rate of interest, locked in for a long time. The debt is 8 per cent of outgoings. There are many governments around the world that would love to have such a low level of debt.\u201d<\/p>\n Back in 1992-93, the financial year Kennett became premier, Victoria\u2019s interest bill was soaking up the equivalent of almost 14 per cent of total revenue, compared to about 5 per cent currently (or an expected 8 per cent in 2026-27).<\/p>\n Steve Bracks and Jeff Kennett.<\/span>Credit: <\/span>Heath Missen<\/cite><\/p>\n Other economists, including RMIT emeritus professor David Hayward, have argued we should not yet be alarmed about the level of debt. Hayward too has pointed out much of the borrowing was locked in at historically low interest rates, using long-term government bonds.<\/p>\n The argument is that this time the debt is being used to provide economic infrastructure, such as public transport, roads, hospitals and schools.<\/p>\n As long as that is delivering the economic benefits it is supposed to it should to a large extent pay for itself. The big question is over what period of time.<\/p>\n For Victoria\u2019s newly appointed premier \u2013 and for the state\u2019s long-serving and experienced treasurer Pallas \u2013 managing the rising interest bill against a backdrop of high interest rates, high inflation and challenging international circumstances will be a difficult a balancing act.<\/p>\n Start the day with a summary of the day\u2019s most important and interesting stories, analysis and insights. Sign up for our Morning Edition newsletter.<\/i><\/b><\/p>\n<\/p>\n
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